ESMA launches consultation to clarify boundaries of trading venues under MiFID II

Dan Barnes

The European and Securities Market Authority (ESMA) has launched a consultation on what constitutes a trading venue, and what can be considered a trading tool – and is therefore unregulated.

Understanding which platforms are in scope for regulation could have a material impact on the development of direct price streaming between brokers and investment manager clients in bond markets.

Responses to the consultation paper (CP) could have massive implications for the market. In over-the-counter (OTC) markets such as fixed income, trading venues are used far less than in listed securities markets. Many electronic tools are used in the buying and selling of instruments which have never been considered trading venues, but could potentially be characterised as such.

Within the CP it delineates between “general-purpose communication systems” which it notes “despite that such systems allow for the possibility of being used for communication of trading interests, they are not governed by rules which facilitate such interaction of trading interests” and other tools that could facilitate multilateral trading.

This is important for the chat- and telephone-based trading that is a major part of OTC negotiation.

Within the paper it also highlights the MiFID II definition of reception and transmission of orders (RTO) and creates a clearer line between order management systems (OMSs) and execution management systems (EMSs), with a distinction made between EMSs that reach out to trading venues, and those which reach directly to counterparties.

The importance of third-party operation of systems – as opposed to proprietary technology – is also factored into considerations.

Individuals and firms can respond to the consultation here. ESMA will consider the feedback it receives to this consultation and expects to publish a final report by the end of Q3 2022.